The high variation orders (VO) and tax credit lifted MMHE’s 4Q17 net profit by 1.4x yoy to RM48m, as it recognized ~RM70m worth of VOs in 4Q17 and ~RM100m in 2017. While management did not guide on the VOs to be expected this year, we believe it would be lower. We cut our FY18-19E EPS by 43% and 35%. With possibly weak earnings delivery over the next 2 quarters and minimal re-rating catalyst, we maintain our HOLD rating with a new target price of RM0.80.

VOs Supported Heavy Engineering Margins

4Q17 one offs consist of RM1.5m unrealised forex gain, RM1.5m impairment loss on trade receivables and written-off inventories, RM0.3m FV gain on derivatives and RM1.8m gain on disposal. Excluding these, 4Q17 core net profit came in at RM46m which was above our and street estimates. This was mainly due to the higher-than-expected claimed VOs and tax credit. FY17 revenue declined by 20% yoy affected by both the heavy engineering and marine segments. However, the VOs in the heavy engineering segment outweighed the negative impact of the overall revenue decline and weaker marine segment performance, resulting in the FY17 core earnings swinging back into a profit.

FY17 Yoy Segmental Analysis

Heavy engineering saw revenue decline by 21% yoy due to lack of major contracts. However, operating losses narrowed to RM36.7m supported by VOs recognised during the year. Marine business revenue also dipped 18% yoy as a result of lower contract value secured during the year, which resulted in a 5.5ppts yoy decline in the operating margin and profit declining by 40%.

Reiterate HOLD

We cut our FY18-19E EPS by 43% and 35% as we do not expect any sizable jobs that will contribute to revenue growth. We maintain a HOLD with a new 12-month target price of RM0.80, based on an unchanged 0.5x P/BV multiple, which is at -1SD of its 5-year forward mean. Key upside risks include any recovery in the industry capex cycle leading to more projects being sanctioned. Downside risks would arise from margin deterioration, and execution hiccups.

Source: Affin Hwang Research - 8 Feb 2018